Hedge Fund Business Plan by swj99471

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									                                 Launching a Hedge Fund

As an existing hedge fund manager, whenever you launch a new hedge fund, you will need
professionaladvisers who have extensive experience in advising similar organisations and
individuals in structuring, establishing and operating hedge fund strategies and products.
Our partners and managers possess the practical experience as well as the technical expertise
to provide responsive, timely and value-added advice to you as you grow.

                                 PricewaterhouseCoopers can bring          • The marketing restrictions in the
                                 significant value to our clients in the     markets you wish to access.
                                 launch phase of a hedge fund.
                                 We have extensive expertise in            • Performance fee structuring,
                                 advising on structuring complex             equalisation, share classes,
                                 alternative investment products for         internal hedging and associated
                                 the full range of target investors.         accounting issues.
                                 We coordinate closely with our
                                                                           • The record-keeping and reporting
                                 offices in all relevant jurisdictions
                                                                             processes you will need to
                                 to ensure that both local and
                                                                             accomplish your specific needs
                                 cross-border matters are addressed.
                                                                             and objectives and to meet the
                                 Issues which you face will include          needs of demanding high net worth
                                 the following:                              and institutional investors (e.g. K1
                                                                             tax forms or controls reports).
                                 • The choice of an appropriate
                                   domicile (specifically whether in       • The selection of service
                                   Europe or an offshore jurisdiction        providers e.g. prime broker,
                                   and taking into account the               fund administrator, transfer agent,
                                   impact of recent FATF and                 listing sponsor, etc., and the
                                   other initiatives).                       selection of systems.

                                 • The most appropriate structure          • Leveraging our considerable
                                   whether umbrella, master/feeder,          experience with accounting
                                   corporate, limited partnership, trust     software and third-party
                                   fund, OEIC and other structures.          administrators to assist you in
                                                                             building an appropriate back
                                 • Minimising any potential taxation         office infrastructure.
                                   borne by the fund on its strategies
                                   and ensuring that investors do          • Assisting with the selection
                                   not pay unnecessary taxation              of legal advisers in the jurisdiction
                                   (in particular what will you be able      of the hedge fund and coordinating
                                   to state in the prospectus?).             the incorporation of the fund
                                                                             with them.
                                 • Should the fund be listed and if so
                                   whether on Dublin, Luxembourg, or
                                   Channel Islands Stock Exchanges.
                                        Launching a Hedge Fund

                                        PricewaterhouseCoopers and its              memorandum and investment
                                        correspondent law firm, Landwell,           management agreement and
                                        provide a full range of services to         reviewing documentation provided
                                        assist both emerging and institutional      by, for example, the prime broker
                                        clients in addressing all these issues.     and administrator.
                                        Our services are “menu” based
                                        enabling clients to select the services    • Commenting on the proposed
                                        that will best achieve their objectives,     accounting for the fund as
                                        and can range from:                          described in the fund’s prospectus.

                                        • Full coordination of the                 • The full range of tax and
                                          establishment of the fund, liaising        regulatory advice.
                                          throughout with you and the
                                                                                   • Ongoing audit of the fund’s
                                          service providers selected.
                                                                                     financial statements.
                                        • Creation of all documents
                                          necessary for the establishment
                                          and offering of the fund, for
                                          example preparing the fund
                                          prospectus/private placement

                                        “PricewaterhouseCoopers provide
                                        a full range of services to assist both
                                        emerging and institutional clients with
                                        the establishment of their funds.”

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                 Buying a Hedge Fund

Given the rapidly increasing demand for hedge funds, many financial institutions are
considering entering, or expanding their presence in, the hedge fund market via the acquisition
of a hedge fund manager. Using the wealth of specific hedge fund expertise available within
PricewaterhouseCoopers, we are uniquely placed to provide insight and views on the strengths
and weaknesses and projected revenue performance of the target business.

                                 We can provide a full range of           business – the most valuable
                                 services to support your acquisition     assets of a hedge fund operation are
                                 including:                               its people.

                                 Strategic review/target search           Negotiation

                                 Using our industry knowledge and         PricewaterhouseCoopers’
                                 connections, we can help you decide      experienced Corporate Finance
                                 whether now is the right time to         professionals can advise and support
                                 pursue an acquisition and assess the     you in securing the best deal.
                                 alternatives open to you. We can also
                                 perform a market analysis to identify    Acquisition due diligence
                                 targets that meet your initial
                                 acquisition criteria, and approach       The purpose of acquisition due
                                 targets on your behalf.                  diligence is to ensure that the
                                                                          acquirer fully understands the key
                                 Valuation advice                         risks in the target business, by
                                                                          assessing and validating the
                                 Understanding valuation issues           assumptions that underlie a deal
                                 will not only permit you to demand       and giving the acquirer a coherent
                                 the best price but also allow you        overview of the operations of the
                                 to set the agenda when developing        hedge fund business. Effective
                                 the strategy of negotiating a            acquisition due diligence also
                                 purchase. Using our knowledge            ensures that the purchaser fully
                                 of comparable transactions,              understands the drivers behind the
                                 PricewaterhouseCoopers’ specialised      revenue stream and profitability of
                                 valuation experts will ensure that you   the business and that areas are
                                 have the best information and            identified which may require costs
                                 arguments on your side of the table.     to be incurred in performing
                                                                          post-deal rectification.
                                 Deal structuring
                                                                          A comprehensive knowledge of
                                 Working with your team,                  these matters and an assessment
                                 PricewaterhouseCoopers Corporate         of their impact on the valuation of
                                 Finance can advise you on                the business provide the acquirer
                                 structuring a transaction to maximise    with valuable information that
                                 value. This will include mechanisms      can be used to support downward
                                 and structures to ensure retention of    negotiation of the purchase
                                 the key personnel within the acquired    consideration.
                                           Buying a Hedge Fund

Our due diligence expertise is             • Risks associated with the difficulty   Integration
focused on gaining a detailed                of evaluating the past performance
understanding of the target, its             of the hedge fund manager when         There are unique risks associated
products and its strategic plan and          the manager is relatively new and      with combining a hedge fund
of the impact of the specific risks          has a short trading record.            business with an existing long-only
associated with the market in which                                                 business, for example, how to retain
the hedge fund manager operates,           • Risks associated with the              long-only managers alongside highly
for example:                                 errors in the fund valuation and       rewarded hedge fund managers, and
                                             administration process, for            how to appropriately segregate the
• Compliance risks associated                example pricing errors leading         two types of trading to overcome
  with the offshore domicile of the          to reputational issues and the         insider trading risks.
  funds, for example the risk of             need to compensate investors.
  non-compliance with anti-money                                                    Similarly, a financial institution buying
  laundering and regulatory                • Operational risks associated with      a hedge fund manager will need to
  requirements.                              the quality and reputation of the      integrate the entrepreneurial culture
                                             service providers to the funds:        of an owner-managed business into
• Risks of non-compliance                    prime broker, administrator, fund      the defined processes that exist in
  with local market restrictions             accountant, transfer agent,            a larger organisation. Building on our
  on the sale of unregulated hedge           research providers, custodian etc.     understanding of the target obtained
  fund investments.                                                                 during the due diligence process,
                                           • Risks associated with the              we can work with you to identify and
• Risks associated with the funds’           dependence of the hedge fund           quantify the business opportunities
  trading strategies, for example            manager on a small number of           and assist with the implementation
  non-compliance with investment             key individuals.                       of the integration plan.
  restrictions, inappropriate gearing,
  and capacity constraints.                • Risks associated with buying a
                                             rapidly growing, owner-managed
• Taxation risks associated with             business, such as a lack of defined
  inappropriate structuring or the           financial reporting structures and
  ongoing management of the                  operational procedures.
  manager and of the funds it
  manages, including inappropriate         Project Management
  transfer pricing arrangements.
                                           High quality project management
• Risks of significant volatility in the   significantly increases efficiency and
  projected revenue stream due to          reduces your time commitment.
  the impact of performance fees           Using our experience, we can help
  and “high watermarks”.                   you plan and run the transaction.
• Risks associated with the investor
  profile, and the pattern of
  subscriptions and withdrawals from
  the funds.

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                          Selling a Hedge Fund

You have worked hard to build a profitable business – now you want to cash out. The owners of a
typical hedge fund business will be faced with three options:

1. Sell the business and continue         potential buyer that your business is      information that will be requested by
   within the business post-sale.         viable without you and that investors      a potential purchaser. Many owner-
                                          will not withdraw their money from         operated hedge fund managers do
2. Sell the business outright.            the fund following your departure?         not have well-defined systems and
                                          Even if you are not currently thinking     procedures in place to demonstrate
3. Wind down the fund and close
                                          of selling your business, you will still   the financial performance of the
   the business.
                                          need to plan your strategy to ensure       business and its adherence to
The first option is becoming more         that you maximise value. Specialist        regulatory compliance, taxation and
common. The rapid increase in             valuation advice is needed.                legal requirements, and we can
demand for hedge fund product                                                        assist you in improving such
                                          A vendor who is fully prepared for         procedures. For example, audited
means that many financial institutions
                                          a deal and anticipates the due             financial information should be
are considering entering, or
                                          diligence requests of a potential          available for the results of the
expanding their presence in, the
                                          acquirer, its lawyers, investigating       business as a whole, as well as
hedge fund market via acquisition of
                                          accountants and investment bankers,        budgets, a documented tax transfer
an existing hedge fund manager.
                                          can control the sales process in a         pricing policy and clearly defined
Using the wealth of specific hedge        timely manner and should be able to        regulatory compliance processes.
fund expertise available within           maximise value on the transaction.
PricewaterhouseCoopers and our            This should include producing
                                                                                     Information Memorandum and
experience of advising hedge fund         a high quality data-room with
                                                                                     Vendor due diligence
managers in similar transactions, we      basic legal and financial data and
are uniquely placed to assist existing    commissioning a quality Information        We can produce an Information
hedge fund or hedge fund-of-fund          Memorandum and a credible                  Memorandum and, additionally,
managers in preparing themselves          Vendor due diligence report. We can        a Vendor due diligence report,
for acquisition, identifying and trying   provide a full range of services to        which will be of particular value
to resolve issues before they become      support the sale including:                if the sale of your business is likely
negotiation points for the acquirer,                                                 to be competitive.
and obtaining the best price and          Strategic review
most favourable terms for the vendor.                                                Vendor due diligence has a number
Traditional valuation techniques may      Using our industry knowledge and           of benefits:
not work for valuing a hedge fund         connections, we can help you decide
                                          whether now is the right time to           • It can expedite the sale by moving
manager, so it may be difficult to
                                          pursue a sale of the business and            forward the due diligence process
know what your business is worth.
                                          assess the alternatives open to you.         and shortening the exclusivity
How do you realise the maximum
                                          We can also perform market analysis          period, since when bidders receive
value for your business when your
                                          to identify potential purchasers that        access to the data-room, the
contacts, trading skills and technical
                                          meet your deal criteria.                     vendor due diligence report should
expertise are not measurable
                                                                                       be complete and final bids will not
assets on your balance sheet but
                                                                                       be subject to significant additional
undoubtedly the most valuable             Deal preparation
                                                                                       due diligence. Access to this report
assets in your firm? Do you have a
                                          Based on our prior experience of             also allows acquirers to submit
succession strategy or a knowledge
                                          hedge fund manager transactions,             a relatively advanced sale and
diffusion plan? If you are considering
                                          we can assist you in assembling the          purchase agreement, with many of
retiring, how can you convince a
                                         Selling a Hedge Fund

 the disclosures, representations        the business and our experience           favourable deal post-acquisition,
 and warranties almost finalised.        of the valuation models that have         and that the integration of the
                                         been used in similar hedge fund           entrepreneurial and relatively informal
• The Information Memorandum is          transactions. Understanding               culture of your existing business into
  given additional credibility by        valuation issues, such as the drivers     the defined processes that exist in a
  such a report; an acquirer is          of performance fees, will not only        larger institutional organisation is
  provided with an independent           permit you to demand the highest          performed in such a way that does
  review of the target by the            price but also allow you to set the       not stifle the entrepreneurial spirit
  accountants which will form an         agenda when developing the strategy       which will have been part of the
  important basis for the purchaser’s    of negotiating the sale.                  success of your business to date.
  own due diligence and valuation.
                                         Using our knowledge of comparable
• It tends to cause less management                                                Negotiation and Project Management
                                         transactions, we can ensure that you
  disruption than traditional buy-side   have the best information and             PricewaterhouseCoopers’
  due diligence due to the fact that     arguments on your side of the table.      experienced Corporate Finance
  one accountant is providing            We can identify any areas which may       professionals can advise and support
  information to a number of             require post-deal rectification costs     you in negotiating the best deal.
  potential bidders. The accountants     to be incurred by the purchaser, and      We can also assist with the
  can work closely with management       which may be used by the purchaser        management of the sales process;
  to develop a timetable for visits by   to attempt to negotiate the purchase      high quality project management
  preferred bidders, which allows        consideration downwards, and can          significantly increases efficiency
  management to maintain their           assist you in addressing such             and reduces your time commitment,
  focus on the operations of the         weaknesses. In our experience,            so that you can concentrate on
  business, neglect of which can         the cost of rectification by the seller   continuing to run the business.
  often be a significant problem         is often less than the reduction in
  during an acquisition due              purchase consideration that may
  diligence review.                      be demanded by the purchaser.
                                         A comprehensive knowledge of these
• It places greater control of the
                                         matters and an assessment of their
  due diligence process, and the
                                         impact on the valuation of the
  interpretation of the due diligence
                                         business to provide the seller with
  findings, with the vendors and its
                                         valuable information.
  advisers. This should prevent
  significant changes to offer prices
  late in the process as the key         Deal structuring
  issues should have been disclosed
                                         PricewaterhouseCoopers Corporate
  prior to the submission of bids.
                                         Finance can advise you in structuring
                                         the transaction to maximise your
Valuation advice                         value creation. This will include
                                         mechanisms and structures to ensure
Our specialised valuation experts can
                                         that you and the key personnel within
prepare a valuation of your business
                                         the business continue to receive a
based on the forecast profitability of

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                 Tax Risks involved in
                                 Hedge Fund Structuring

As a hedge fund manager, there are many issues involved in both launching a hedge fund
operation and also in managing that operation over successive years. You will therefore need
professional advisers who have extensive experience in advising such organisations and
individuals in managing the tax risks associated with your particular hedge fund strategy and
products. Our partners and managers possess the practical experience as well as the technical
expertise to advise you on how the tax risks involved in your structure can be minimised.

                                 PricewaterhouseCoopers provides           • Advising on inter-territory pricing
                                 a range of tax services to assist both      and the impact of the interaction
                                 emerging and institutional clients          between a variety of local tax and
                                 with the establishment of their             regulatory regimes.
                                 hedge funds. Our services are menu
                                 based enabling clients to select the      • Drafting agreements between
                                 tax services that will best achieve         entities in different jurisdictions to
                                 their objectives.                           confirm the services provided by
                                                                             each and their respective
                                 Our menu of services includes:              responsibilities.

                                 • Reviewing your business                 • Consideration of the target investor
                                   plan to establish whether any             profile and tailoring of the fund
                                   potential tax risks may arise             structure to ensure that no adverse
                                   within your structure.                    taxation consequences are
                                                                             triggered for certain investor
                                 • Advising on the tax legislation of        groups. This would include advice
                                   the relevant jurisdictions applicable     on appropriate “wrappers” for
                                   to your structure including the           different markets.
                                   requirements for maintaining
                                   central management control              Following the launch of a fund we
                                   where desired.                          can offer several services to monitor
                                                                           and minimise potential tax risks
                                 • Consideration of the most               arising, including:
                                   appropriate location of
                                   management services both from           • Assistance in developing operating
                                   a business practical point of view        guidelines or a checklist to manage
                                   and a tax perspective.                    the residency requirements of
                                                                             entities in different territories.
                                 • Advising on the taxation matters
                                   in relation to the structuring of the   • Production of a transfer pricing
                                   investment adviser and the                document outlining the pricing
                                   associated personal tax planning          policies adopted for each entity
                                   for the investment adviser’s              and the supporting documentation.
                                   principals, senior executives
                                   and employees.
                                        Tax Risks involved in
                                        Hedge Fund Structuring

                                        • Performance of a “tax health          • Dealing with all compliance issues
                                          check” on existing structures           in the various management firm
                                          to identify any potential issues,       and fund locations i.e. filing tax
                                          or existing tax risks that need         returns and liaising with the local
                                          to be addressed.                        tax authorities to ensure the most
                                                                                  favourable tax treatment.
                                        • Detailed briefing for non-tax
                                          specialist staff on the importance    • Calculation of returns to be
                                          of compliance with the taxation         allocated to investors in the fund
                                          requirements of various                 where their domestic tax authorities
                                          jurisdictions.                          require this information.

                                        • Ad hoc advice on tax risks of
                                          specific trading strategies.

                                        “Our services are menu based enabling
                                        clients to select the services that will best
                                        achieve their objectives. These services are
                                        coordinated across various professionals to
                                        ensure that tax risks are monitored and
                                        effectively minimised.”

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                 Hedge Fund Regulation
                                 Key challenges facing management – a fast changing
                                 regulatory environment

The regulation of investment managers has become much more prescriptive in recent years.
European regulators are increasingly scrutinising the hedge fund industry. The costs of getting
regulation wrong are significant – the reputational damage, the financial cost and the management
time involved in correcting problems often far outweigh the original issue. Putting the right
structure and people in place “first time” has become increasingly important.

                                 The hedge fund industry is                  • The quality of customer
                                 growing quickly in Europe. As it is           agreement reporting.
                                 a multi-jurisdictional environment,
                                 with national marketing rules,              • Security and use of the internet.
                                 different regulators in each
                                                                             Pitfalls are appearing as firms
                                 national territory and increasingly
                                                                             grapple with these issues. Significant
                                 sophisticated clients, it is all too easy
                                                                             system changes have their own
                                 to make a compliance mistake.
                                                                             challenges but experience has
                                 Some hedge funds operate within the
                                                                             shown that a number of regulatory
                                 compliance framework of a large
                                                                             problems have also arisen. These
                                 institutional fund manager or bank,
                                                                             relate not just to the firm but also to
                                 where the compliance culture and
                                                                             individual risk – clearly evidenced in
                                 processes are well established and
                                                                             the UK by the FSA’s approach to
                                 monitoring is strong. Smaller hedge
                                                                             Approved Persons.
                                 fund managers do not have the
                                 advantage of this support and               PricewaterhouseCoopers has
                                 therefore rely on professional              a team of regulatory consultants
                                 advisers to assist them in meeting          blended from the industry, European
                                 their compliance obligations.               regulators, the FSA, and from our
                                                                             business advisory practice. Our team
                                 The issues faced by hedge fund
                                                                             is experienced in assisting hedge
                                 managers include:
                                                                             fund managers to find practical
                                 • The increased number of regulatory        solutions to regulatory problems
                                   issues that have to be identified         given the size and nature of the
                                   and managed because of multi-             business. We have significant
                                   jurisdictional investors and entities     practical experience of helping
                                   within the hedge fund group.              clients manage the regulatory risks
                                                                             that arise during startup and periods
                                 • The complicated nature of                 of change. We have assisted many
                                   the products offered by hedge             firms to identify solutions that help
                                   fund groups.                              management in meeting the
                                                                             requirements of both stakeholders
                                 • The conflict of interest that arises      and the regulators.
                                   when a manager runs both long-
                                   only funds and hedge funds and
                                   the related segregation of duties.

                                 • Relationships with third parties
                                   e.g. outsourcing.
                                        Hedge Fund Regulation
                                        Key challenges facing management – a fast changing
                                        regulatory environment

                                        Our Regulatory services                    are accountable for compliance
                                                                                   and risk management, e.g. meeting
                                        PricewaterhouseCoopers provides            the FSA’s expectations and
                                        the following key services:                rules in relation to senior
                                                                                   management responsibilities.
                                        • Assisting with the authorisation
                                          of new hedge fundmanagement             • The provision of interim
                                          entities.                                 compliance staff either to manage
                                                                                    compliance functions or to carry
                                        • Assisting firms identify the correct
                                                                                    out monitoring reviews.
                                          capital structure for their business.
                                                                                  • Compliance cost-effectiveness
                                        • Providing tailored advice on
                                          European, UK (and overseas)
                                          regulations.                            • Mock supervision visits.
                                        • Design and implementation of            • Advising on effectively handling
                                          effective compliance arrangements.        regulatory issues, including
                                                                                    enforcement actions.
                                        • The design of risk-based
                                          compliance monitoring frameworks        • Undertaking investigations on
                                          and programmes.                           behalf of clients.
                                        • Training of compliance staff.           • Liaising with your
                                                                                    independent consultants.
                                        • Assessing and introducing
                                          technology-led compliance               • Merger and integration
                                          solutions.                                regulatory planning and
                                                                                    implementation reviews.
                                        • Implementing structures to
                                          demonstrate that senior managers

                                        “We have assisted many firms to identify
                                        solutions that help management in meeting
                                        the requirements of both stakeholders and
                                        the regulators.”

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                   UK Investment Manager

Under UK tax legislation the “trading” profits of a non-resident person which arise through the
activities of a UK agent are subject to UK tax. In practical terms, this means that a UK investment
adviser to a hedge fund could potentially be liable to UK tax on a hedge fund’s trading profits
arising from its activities in the UK, that is, unless the adviser satisfies the UK Investment Manager
Exemption. PricewaterhouseCoopers has the practical experience and technical knowledge in
structuring operations to ensure that the UK adviser meets the Investment Manager Exemption.

                                   Is an entity trading?                      • the transactions must be
                                                                                carried out in the ordinary course
                                   There is no statutory definition of          of that business;
                                   what constitutes trading under UK
                                   law, however, factors which may            • the investment manager must act in
                                   indicate a trading activity include a        an independent capacity;
                                   high frequency of transactions, a short
                                   period of ownership, short selling,        • the investment manager and its
                                   a short-term profit motive, the use          connected parties must not be
                                   of leverage, etc. Since the majority         beneficially entitled to more than
                                   of these characteristics are often           20% of the profits and gains arising
                                   displayed by hedge funds, there is a         from the transactions carried out by
                                   risk that a proportion of the profits of     the investment manager/adviser;
                                   a hedge fund could become liable to
                                                                              • the investment manager’s/adviser’s
                                   UK tax even though the fund is not
                                                                                remuneration must be at a rate
                                   resident in the UK.
                                                                                which is not less than a customary
                                   However, providing the manager               rate for that class of business; and
                                   satisfies the UK Investment Manager
                                                                              • the investment manager must not
                                   Exemption, profits of the nonresident
                                                                                be an agent of the fund in relation to
                                   hedge fund are outside the UK tax
                                                                                other income.
                                   net. This means that the UK Revenue
                                   only taxes the profits of the agent, the   It should be noted that the interaction
                                   UK investment adviser, rather than the     of these conditions can be quite
                                   profits of its principal, the offshore     complex, especially where
                                   hedge fund.                                partnerships (for the fund or
                                                                              investment manager/adviser)
                                   In order to fall within the Investment
                                                                              are used.
                                   Manager Exemption, the investment
                                   manager/adviser must satisfy, in
                                   respect of “investment transactions”       1. Investment transactions
                                   undertaken for the non-resident            For the IME to apply, the
                                   hedge fund, the following conditions       investment manager/adviser
                                   set out in section 127(3) FA               must be undertaking an
                                   1995/Schedule 26 FA 2003:                  investment transaction.
                                   • the investment manager/adviser           An “investment transaction” is defined
                                     must carry on a business of              to mean:
                                     providing investment management
                                           UK Investment Manager

- transactions in shares, stock,           length. The term ‘independent’ is itself   more than 20% of the profits of the
  futures contracts, option contracts      open to many interpretations, and has      fund. It is regarded as satisfied if met
  and securities of any description but    led to the Inland Revenue setting out      in aggregate over a period of not
  excluding futures contracts and          some ‘safe harbours’ in its Statement      more than 5 years. Therefore, if there
  options contracts relating to land; or   of Practice 1/01. The Inland Revenue       is entitlement to more than 20%
                                           will accept that satisfaction of any one   of profits in a particular period, the
- transactions consisting in the           of the criteria below will satisfy the     test will still be met so long as there
  buying or selling of any foreign         independent agent test where all of        is a period (up to 5 years) over which
  currency or in the placing of money      the other tests of the IME are met:        the average entitlement is 20% or
  at interest; and                                                                    less. Professional fees are excluded
                                           • where the provision of services to       in arriving at the profits provided
- such transactions as the Treasury          the non-resident (and persons            they would be deductible for UK
  may designate by regulations.              connected with the non-resident)         tax purposes.
                                             is not a substantial part of
It is important that investment
                                             the investment management
managers/advisers review the type                                                     5. Customary Rate
                                             business (≤70%);
of investment transactions they
undertake as not all transactions are                                                 The UK investment manager/adviser
                                           • from the start of a new investment
investment transactions for the                                                       must receive remuneration not less
                                             management business provided the
purpose of the IME.                                                                   than the customary rate for that class
                                             above condition is satisfied within
                                                                                      of business. Problems may arise in
                                             18 months;
                                                                                      relation to this condition where
2. Investment Manager/Adviser
                                           • where the investment                     management capital and early
Where the investment                         manager/adviser intends to satisfy       investors are charged a discounted
manager/adviser acts as agent of             either of the above conditions and       fee. Also, where services are provided
the fund and has the authority to            fails to do so for reasons outside his   to the fund from other affiliated
make binding decisions on behalf             control having taken any reasonable      entities, it is necessary to establish
of the offshore fund, the agent must         steps to fulfil that intention;          the appropriate remuneration for the
do this in the ordinary course of an                                                  UK investment manager/adviser.
investment management business.            • where services are provided to a
                                             collective fund, the interest in which   We can use our extensive
The UK investment manager/adviser
                                             is quoted on a recognised stock          understanding of the Investment
must not act as agent for the fund
                                             exchange or freely marketed; and         Manager Exemption rules to offer
in relation to any other income.
                                                                                      clients a high quality service in
                                           • where services are provided to a         evaluating satisfaction of s.127 FA
3. The Independence Test                     widely held collective fund (50% not     1995 / Sch 26 FA 2003 criteria and
The Investment Manager Exemption             held by 5 or fewer people and no         benchmarking the result.We can bring
requires that the investment                 one person owning > 20%).                significant value to our clients, when
manager/adviser acts on behalf                                                        they are establishing a hedge fund or
of the offshore client in an               4. The 20% test                            when established hedge fund
independent capacity, i.e. carries on                                                 managers start trading operations in
                                           This requires that the investment          the UK.We have unique expertise in
an independent business that deals
                                           manager/adviser and connected              structuring complex arrangements.
with the offshore funds at arm’s
                                           persons intend not to be entitled to

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                Starting a Hedge Fund
                                Manager Business

Setting up and running a hedge fund business can be as challenging as running the hedge fund
itself. In the set up stage, you need professional advisers who have extensive experience in
advising organisations and individuals with the structuring, establishment and operations of a
hedge fund business. Our partners and managers possess the practical experience as well as the
technical expertise and cross-border knowledge to provide responsive, timely and value-added
advice to you as you grow.

                                PricewaterhouseCoopers can bring            • Your inter-territory pricing.
                                significant value to our clients in
                                the start-up phase, when they are           • The differing tax and accounting
                                establishing an independent advisory          issues that arise in the UK
                                entity or, in the case of an existing         compared to other financial centres
                                financial services organisation,              (e.g. US), managing tax asymmetry
                                in establishing or expanding an               (e.g. through deferral or foreign tax
                                infrastructure to support hedge               credits) and reporting timetables.
                                fund strategies. We have extensive
                                                                            • Whether to partner with hedge
                                expertise in advising on structuring
                                                                              fund incubators, providers of
                                complex alternative investment
                                                                              seed capital and other alliance
                                products for the full range of target
                                                                              partners to achieve business
                                investors. We coordinate closely with
                                                                              and tax efficiencies while
                                our offices in all relevant jurisdictions
                                                                              maintaining flexibility.
                                to ensure that both local and
                                cross-border matters are addressed.         • Application for regulatory
                                                                              authorisation for the investment
                                Issues which you face will include
                                                                              adviser (e.g. FSA in the UK, CSSF
                                the following:
                                                                              in Luxembourg, CBI in Dublin) and
                                • The choice of the new investment            how much to outsource your
                                  management entities, whether                compliance arrangements.
                                  onshore and/or offshore and
                                                                            • Developing your business plan.
                                  whether company or partnership.
                                                                            • Identifying, documenting or
                                • The structuring of the investment
                                                                              assessing regulatory compliance
                                  adviser, and associated personal
                                                                              policies and procedures for
                                  tax planning for the investment
                                                                              registered advisers and commodity
                                  adviser’s principals, senior
                                                                              pool operators (including the new
                                  executives and employees
                                                                              US privacy regulations).
                                  especially what flexibility is
                                  desirable for the future and what         • All aspects of launching
                                  needs immediate implementation.             your hedge fund (see our
                                                                              separate insert).
                                • Whether to set up management
                                  entities to employ staff and
                                  provide administrative services,
                                  especially with a view to minimising
                                  regulatory capital.
                                        Starting a Hedge Fund
                                        Manager Business

                                        • Building an appropriate and reliable     They can range from full coordination
                                          back office infrastructure covering      of the establishment of the fund
                                          both the fund and management             manager operations, including the
                                          entities, including determining your     fund, to merely giving our necessary
                                          information technology needs.            opinions on the relevant application
                                                                                   forms for regulatory authorisation.
                                        • Implementing risk management,            We can advise on all aspects of the
                                          operational and financial                structuring or just on the complex
                                          processes and systems in a rapidly       taxation arrangements to secure
                                          growing environment.                     personal tax efficiency or on the
                                                                                   transfer pricing documentation.
                                        PricewaterhouseCoopers and its
                                        correspondent law firm, Landwell,
                                        provide a full range of services to
                                        assist both emerging and institutional
                                        clients in addressing all these issues.
                                        Our services are “menu” based
                                        enabling clients to select the services
                                        that will best achieve their objectives.

                                        “PricewaterhouseCoopers provide a
                                        full range of services to assist both
                                        emerging and institutional clients with the
                                        establishment of their hedge fund

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
Investment Performance
Measurement Services

Market Need                              Our services include:

• Competition amongst hedge              • assistance in selecting and
  fund managers is becoming                implementing performance
  more intense.                            systems;

• Clients are becoming more              • review and assessment of
  sophisticated and more                   performance measurement and
  demanding; they want to be able          reporting procedures; and
  to compare managers.
                                         • training and education in all areas
• Investment performance will              of the business.
  remain a key driver for managers
  to differentiate themselves.           In addition:

• Global Investment Performance          • We offer advice and assistance
  Standards (“GIPS” or “Standards”)        throughout the process of
  have become widely accepted.             achieving compliance with GIPS
  They help to provide credibility to      and reporting compliant
  a performance history, as well as        information.
  discipline to performance
                                         • We act as an independent verifier
                                           of compliance with GIPS.

PricewaterhouseCoopers Solution          • We also provide other attestation
                                           services on the performance track
• PricewaterhouseCoopers is able           record of managers.
  to provide assistance in identifying
  and resolving issues facing hedge
  fund managers in performance
  measurement and reporting.

“PricewaterhouseCoopers is able to
provide assistance in identifying and
resolving issues facing hedge fund
managers in performance measurement
and reporting.”
                                        Investment Performance
                                        Measurement Services

                                        Why PricewaterhouseCoopers?              • We are recognised experts in
                                                                                   training on the Standards and offer
                                        PricewaterhouseCoopers has                 courses, both in partnership with
                                        extensive experience in investment         the body that sponsors the
                                        performance measurement:                   Standards, and in our own right.
                                        • We offer a globally integrated
                                          service, with performance
                                          specialists in over twenty countries
                                          around the world.

                                        • We are at the forefront of
                                          developments in this area, through
                                          membership of committees of the
                                          Standard-setting body. We also
                                          contribute to the development of
                                          the Standards by way of detailed
                                          responses to draft guidance.

                      Define                                  Overcome            Compliant
   Understand                             Assess
                      the reporting                           barriers to         reporting of        Verification
   the standards                          readiness
                      entity                                  compliance          performance

                                        “We are recognised experts in training on
                                        the Standards and offer courses, both in
                                        partnership with the body that sponsors the
                                        Standards, and in our own right.”

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                   Hedge Funds
                                   Anti Money Laundering Issues

In light of recent events, members of the financial community can no longer afford to ignore the
issue of anti money laundering (“AML”) and hedge funds and their managers are no exception.
Governments have made their intentions clear: those seeking to move illicit funds – in particular
terrorist funds – through the international financial system will have their access blocked at every
available opportunity.

                                   Money laundering: the risks              but any underlying customer on
                                                                            behalf of whom they may be acting.
                                   The risk of money laundering to
                                   the hedge fund and its manager is        In the current climate, anonymity
                                   two-fold:                                is unlikely to be an option. If a
                                                                            fund’s adviser or broker is regulated
                                   • the reputational damage if the         in financial centres such as
                                     fund is associated with money          New York or London, they are likely
                                     laundering; and                        to require information about both
                                                                            the offshore manager and the
                                   • access to the major financial
                                                                            underlying investors.
                                     institutions may become difficult if
                                     funds will not, or cannot, provide     Do you know the identity of all
                                     satisfactory AML information.          investors in the fund? Would you be
                                                                            able to provide documentary
                                   Issues to consider therefore include:
                                                                            evidence if requested?
                                   Know Your Customer: Increased            Would the provision of information on
                                   transparency                             investors, for example the broker
                                                                            dealers with whom you transact, be
                                   Know Your Customer (“KYC”) is            particularly commercially sensitive?
                                   a central premise of AML regimes
                                   around the world. Regulated firms        The amount and nature of the
                                   need to be satisfied that they know      documentary evidence will depend
                                   who they are dealing with, not only      on the source of the funds and type
                                   their immediate contact, such as         of entity.
                                   the fund manager, or introducer,

                                   “If a fund’s adviser or broker is
                                   regulated in financial centres such as
                                   New York or London.”
                                        Hedge Funds
                                        Anti Money Laundering Issues

                                        Funds and investors from territories    Do you obtain the bare minimum of
                                        without recognised AML regimes,         KYC information to meet the local
                                        particularly those from offshore        regulatory requirements or move to
                                        jurisdictions, will be expected to      an international standard of
                                        provide more information.               verification of identity procedures?
                                        Corporate entities and trusts will
                                        be the subject of even further          What impact will such due
                                        scrutiny by regulated firms.            diligence of your investors have
                                                                                on your competitive position with
                                        Consequently, hedge funds and           other funds?
                                        their managers should expect those
                                        parties subject to AML regulations to   PricewaterhouseCoopers have
                                        be asking more questions where          experts that can advise you on
                                        funds are located in tax efficient      AML rules and regulations, as well
                                        jurisdictions.                          as designing AML best practice
                                                                                solutions for your particular
                                        Protecting your reputation

                                        Fund managers need to understand
                                        the level of money laundering risk
                                        they are facing in each of the
                                        jurisdictions in which they operate.

                                        “Hedge funds and their managers should
                                        expect those parties subject to AML
                                        regulations to be asking more questions
                                        where funds are located in tax efficient

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                 Transfer Pricing

Transfer pricing is an important issue for any hedge fund manager with cross-border operations
where services are provided by connected parties. Tax authorities around the world are focusing
more attention on transfer pricing issues.

                                 This is a particularly important issue    Ensuring that the benefits of the
                                 where a hedge fund uses a hedge           Investment Manager Exemption or
                                 fund manager in one jurisdiction          the overseas equivalents are
                                 who in turn delegates discretionary       available.
                                 management to an investment
                                 manager or adviser in another            • Providing comfort that
                                 jurisdiction. To ensure that the           the transfer pricing obligations
                                 hedge fund is kept outside the tax         of the manager/adviser are
                                 jurisdiction where the investment          being followed.
                                 manager operates, the remuneration
                                                                          • Defending transfer pricing policies
                                 the investment manager receives
                                                                            as a result of fiscal enquiry.
                                 must be arm’s length (e.g. see UK
                                 Investment Manager Exemption).           • Preparing or reviewing transfer
                                                                            pricing documentation, especially
                                 In addition, in many jurisdictions,
                                                                            using our detailed experience
                                 hedge fund advisers are required to
                                                                            and knowledge in:
                                 prepare and file tax returns including
                                 a declaration that they have              identifying relevant commercial or
                                 submitted a correct and complete          financial transactions engaged in
                                 return. Thus it is implicit that the      by associated entities;
                                 entity has used arm’s length transfer
                                 prices in compiling the return and        identifying any intangible
                                 that the approach to determining the      assets utilised;
                                 arm’s length price is supported by all
                                                                           ascertaining the price applied in
                                 the available evidence.
                                                                           respect of such services;
                                 PricewaterhouseCoopers can assist
                                                                           determining who performs the
                                 you with structuring your operations
                                                                           key functions, bears the key risks,
                                 so that entities are established, and
                                                                           and owns the key assets;
                                 intra-group services are provided and
                                 priced, in a tax-efficient manner.        obtaining comparable information
                                 We can also assist if you are required    in respect of the different activities
                                 to defend your transfer pricing           by reference to the results of third
                                 policies to fiscal authorities.           parties involved in performing
                                                                           similar types of functions;
                                 Our menu of services includes:
                                                                           financial modelling to secure
                                 • Structuring:
                                                                           a desirable and defensible
                                   Advising on structures that will        outcome; and
                                   achieve the objectives of the
                                                                           mitigating taxation and penalties.
                                   company/partnership/fund in a tax
                                   efficient way.
                                        Transfer Pricing

                                        Our transfer pricing expertise can       across our network of offices
                                        add significant value by ensuring that   around the world, so as to
                                        entities are structured from the         provide you with transfer pricing
                                        outset in a tax-effective way. We also   documentation that meets local
                                        have a proven track record of            requirements and is consistent
                                        assisting clients in documenting their   across your group operations.
                                        transfer pricing methodology, by
                                        sharing best practice and providing
                                        guidance, questionnaires, templates
                                        and a detailed review. We liase

                                        “Our transfer pricing expertise can add
                                        significant value by ensuring that entities
                                        are structured from the outset in a
                                        tax-effective way.”

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                  Managing Your Risks

Risk assessment and risk management are critical to any financial services business wishing to
protect its market position and to satisfy the demands of regulators and clients. Hedge fund firms
are no exception, indeed concern that investors should be better protected against risks
associated with less understood instruments impose a need to demonstrate strong risk
management capability.

                                  Your business should consider              Our investment management clients
                                  taking advantage of                        use our services to design and
                                  PricewaterhouseCoopers’                    implement controls as part of
                                  risk services when:                        programmes of change, the
                                                                             introduction of new systems or to
                                  • you are uncertain of the                 provide independent assurance that
                                    operational, financial or regulatory     adequate controls are in place and
                                    risks facing your business;              operating as intended.
                                  • your business does not have a            A controls framework should first
                                    complete and robust framework of         exist to guide the design of internal
                                    risk, process and security controls;     controls by reflecting your business
                                                                             drivers, the organisation’s culture and
                                  • mitigation strategies are required to
                                                                             its attitude to risk. Controls can then
                                    overcome key risks; or
                                                                             be developed in the following areas:
                                  • regulatory or investor pressure
                                                                             Business process controls:
                                    requires increased effectiveness
                                                                             best-practice system and clerical
                                    and transparency of your risk
                                                                             control solutions to mitigate process
                                                                             level business risks;
                                  PricewaterhouseCooper’s Global
                                                                             Application processing controls:
                                  Risk Management Solutions (GRMS)
                                                                             ensure satisfactory management
                                  group works with fund managers,
                                                                             and auditability of the transactions
                                  administrators, investment banks and
                                                                             and data held and processed by
                                  institutional investors, leveraging risk
                                                                             your business systems;
                                  expertise across the full spectrum
                                  of market and operations risk.             Application security controls:
                                  Drawing on a global network of 6,000       manage user authorisations to
                                  risk professionals, we work with           provide appropriate information and
                                  organisations to develop and               system access and adequate
                                  maintain a competitive edge by             segregation of duties; and
                                  managing risk at a strategic and
                                  tactical level. We can help you            Technical infrastructure controls:
                                  identify the critical risks that you       maintain a secure technical platform
                                  face, reduce your risk exposure and        for the development and operation
                                  develop opportunities for growth           of business systems.
                                  and expansion.
                                        Managing Your Risks

                                        Trust and security                      business risks and developing your
                                                                                risk management processes.
                                        PricewaterhouseCoopers provides
                                        a range of services to help you         For example, ORCA (Objectives,
                                        ensure that your business remains       Risks, Controls, Alignment) provides
                                        safe and secure from improper use       a framework for understanding and
                                        and access to your systems,             defining risk. It helps instil an
                                        networks and internet-based             instinctive and consistent
                                        operations. We will:                    consideration of risk and reward in
                                                                                day-to-day planning and the
                                        • Identify areas of risk within         achievement of strategic, business
                                          your internet strategy, business      and operational objectives.
                                          processes and technical
                                          architecture;                         The ORCA framework:

                                        • Assess the development,               • focuses on how organisations,
                                          deployment and operation of new         business units, business processes
                                          infrastructures; and                    or individuals describe and
                                                                                  prioritise their strategies and
                                        • Design, develop and implement           objectives;
                                          security strategies, eg:
                                                                                • is founded on the premise that
                                         Identity management: security            risks must be taken in the pursuit
                                         architecture design, security            of opportunities;
                                         product implementation,
                                         security testing.                      • helps organisations to plan specific
                                                                                  risk management or control
                                         Internet security: penetration           processes to respond to potential
                                         testing, cybercrime investigation        threats and opportunities; and
                                         and penetration.
                                                                                • helps organisations to align their
                                         Enterprise wide: Enterprise              strategic objectives with their own
                                         Security Architecture Systems            risks, controls and processes.
                                         (ESAS), security policies and
                                         standards together with security       RiskPRiSM software can be used
                                         function organisation.                 to support the ORCA framework,
                                                                                by providing a tool that helps to
                                        Methods and tools                       define, link and align organisation
                                                                                or business unit objectives, risks,
                                        A wealth of risk management             controls, actions and issues.
                                        methods and tools provide GRMS          A combined ORCA/RiskPRiSM
                                        professionals with thorough             approach increases the likelihood of
                                        approaches to analysing your            long-term risk management success
                                                                                after completion of the project.

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                          Delivering Technology and
                                          Business Change

Systems are core to the hedge fund industry. They bring up-to-date global market data to the
hedge fund manager’s desktop; manage, exchange, report and analyse the funds, trades and
investments; provide the connections between investors, fund managers, administrators, prime
and other brokers and custodians; maintain the accounting records; and provide information for
owners, investors, regulators and other third parties. Optimal systems must be integrated with
sound business operations and proactive risk management to provide systems reliability, product
and cost competitiveness and long-term business performance.

Your business should consider             operations are secure, controlled         to the project teams and report
taking advantage of                       and efficient. Our clients benefit from   the risks and likelihood of project
PricewaterhouseCoopers’ technology,       the creation and implementation of        success to management.
operational improvement and project       sustainable business models that
management services when:                 maximise the performance of today,        Successful change is
                                          but not at the expense of tomorrow.       achieved through people.
• your business is starting up or                                                   PricewaterhouseCoopers also
  entering a new period of growth;                                                  provides change management
                                          Change and project management
                                                                                    skills to manage or assist in:
• regulatory requirements,
                                          Helping clients control and deliver
  competitive position or market                                                    • Preparing your organisation for
                                          major business change is a core
  pressures demand change;                                                            change (change readiness);
                                          competency of our GRMS group.
• changes to your business,               Without the necessary specialist          • Encouraging a culture that
  operational or technology strategy      skills and resources, there are high        fosters innovation;
  are planned;                            risks of failure, and of undue impact
                                          to your services and operations.          • Providing change leadership;
• you are not satisfied with the          PricewaterhouseCoopers has an
  performance or costs of your            excellent reputation in this area,        • Stakeholder management;
  business operations;                    providing project management              • Communicating internally and
                                          disciplines to:                             externally to gain support and
• significant or recurring operational
  breakdowns are experienced;             • Ensure the delivery of critical           prepare for implementation;
                                            business projects;                      • Designing and developing learning
• benefits from a major improvement
  initiative are not realised; or         • Recover failed or failing projects;       solutions, including e-learning;

• multiple improvement initiatives fail   • Manage third parties and                • Creating sustainable improvement
  to identify or solve the root causes      outsourcers; and                          in people’s performance.
  of operational problems.
                                          • Plan and manage testing and             Technology evaluation
PricewaterhouseCoopers’ Global              acceptance of new processes and
Risk Management Solutions (GRMS)            systems; and                            When you need to improve or
group has a global reputation of                                                    expand your systems or technology
excellence in the selection, design       • Plan, measure and manage the            you may need to consider
and delivery of process and system          delivery of benefits.                   e-systems, bespoke applications,
solutions. We work with firms across                                                in-house developments, external
                                          We also provide independent project
the investment management                                                           services, or review your entire
                                          review and assurance of your internal
community to ensure that their                                                      systems architecture.
                                          or third party projects, provide advice
                                              Delivering Technology and
                                              Business Change

Our GRMS team will work with you              Operational improvement                   We conduct diagnostics and leverage
to determine the system applications                                                    PricewaterhouseCoopers’ extensive
and infrastructure options                    GRMS has proven frameworks                knowledge base, to determine where
appropriate for supporting your               and a practical tool-set for delivering   the greatest opportunities for
specific products, channels, services,        sustainable improvement within            improvement exist, for example:
volumes, third party relationships,           investment management
locations, security and control needs.        organisations. By focusing on             Management information: Information
As your business relies upon the              revenue, cost and controls, we seek       design & alignment with value
continuing and effective support of           to improve the performance of the         drivers, data sources & systems,
your IT suppliers; we can provide             primary operating processes of your       timeliness & efficiency of information
the procurement disciplines to enable         business by identifying, quantifying      production, relevance & usage of
you to assess the suppliers as part           and realising revenue enhancement         information, performance
of the decision making process                and cost reduction opportunities,         measurement and presentation
and to advise upon the contracts              whilst also minimising your risks.        & communication of information.
and pricing required to protect and
                                              We can improve the underlying             People and learning: Skills &
benefit your business.
                                              performance of your business              competencies, knowledge
                                              by aligning technology and                management & continuous learning,
Operational resilience and                    operations to your business strategy;     human performance management,
disaster recovery                             enhancing the effectiveness of            management style, team & group
                                              technology management; and                behaviour, organisational culture.
September 11 2001 reminded
                                              optimising the use of technology.
us all of the importance of recovery                                                    Processes: Design & optimisation,
                                              We can help you consider
planning to ensure the continued                                                        execution & measurement, process
                                              opportunities for outsourcing IT or
operation and performance of                                                            integration, continuous improvement,
                                              operational processes where this
your business in an emergency or                                                        documentation & training and
                                              may achieve genuine cost reduction,
disaster situation.                                                                     process control & maintenance.
                                              service improvement, or release
Our specialists have helped many              resources to focus upon other key
                                                                                        Technology and assets:
clients plan for major disruptions in         areas of your business.
                                                                                        Technology strategy, technology
business operations. Our services                                                       & project governance, enterprise-
                                              We assist clients improve their
range from process-based reviews                                                        wide technology systems, change
                                              operational control (ie. to measure
of your disaster recovery planning                                                      management & maintenance,
                                              and manage operational
and business resumption plans; to                                                       technology operations, trust &
                                              performance, identify and mitigate
detailed assessments of how well                                                        security and business continuity.
                                              operational risk and comply with
the objectives of availability, reliability
                                              investment management regulations
and data integrity are maintained                                                       Alliances: Alliance strategy,
                                              that impact operations) through
within your IT environment; and to                                                      legal agreement, governance
                                              services such as balanced scorecard
the planning and management of                                                          & decision making, staffing &
                                              design, management information
tests to confirm that your continuity                                                   resource requirement, core
                                              process design, business intelligence
plans work in practice.                                                                 capabilities & critical knowledge
                                              system implementation and the
                                                                                        and organisation & culture.
                                              design, building and implementation
                                              of operational risk frameworks.

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719 or Robert Mellor (44) 20 7804 1385, or your usual local
PricewaterhouseCoopers contact.
                                 Reports on Controls for
                                 Hedge Fund Managers

Recent reports indicate that institutional investors such as pension funds, charities and insurance
fundsare allocating more money to hedge funds. Consequently, the control environment at a hedge
fund manager is becoming the subject of ever-greater focus by investors and regulators and by the
boards of directors of the funds themselves. However, there are no accepted standards for hedge
fund operational risk management and the level of outsourcing and cross-border relationships in
the European hedge fund industry makes oversight of an entire structure by a single regulator
impossible. In this context, the onus is on the hedge fund manager to be able to demonstrate the
robustness of its control environment.

                                 Background                               investors such as pension fund
                                                                          and charity trustees to review their
                                 Reporting on controls originated         controls as part of an increased
                                 in the United States with the            focus on governance.
                                 introduction of Statement of Auditing
                                 Standards (SAS) 70 – “Reports on
                                                                          Reporting framework
                                 the Processing of Transactions by
                                 Service Organisations”. Guidance for     A key element of the SAS70 and
                                 such reporting now exists in several     FRAG21 reporting frameworks is
                                 countries, for example in the            that they allow for independent
                                 United Kingdom under a standard          attestation of the controls by a firm
                                 commonly called “FRAG21”, which          of independent accountants, and the
                                 is currently being updated to move       majority of long-only investment
                                 to a model very close to the existing    managers in the UK, and increasingly
                                 SAS70 guidance.                          in the rest of Europe, now produce
                                                                          such reports on an annual basis.
                                 Reports on Controls                      The advantages to a hedge fund
                                                                          manager of having a report on
                                 Initially, reports on controls in the    controls include:
                                 investment management industry
                                 were prepared by service                 • Informing clients, including the
                                 organisations such as custodian            directors of the funds and their
                                 banks, fund accountants, transfer          auditors, how the operational risks
                                 agents, benefit plans and payroll          that are most relevant to them are
                                 providers. However, the SAS70 and          managed and providing them with
                                 FRAG21 frameworks can be applied           comfort on the hedge fund
                                 to any organisation that executes          manager’s control environment.
                                 transactions and maintains
                                 accountability for them, or records      • Assisting in demonstrating
                                 transactions and processes related         compliance with the requirements
                                 data, and it has become common             of various regulators regarding
                                 practice for “long-only” investment        regular current review of
                                 managers to prepare such reports on        internal controls.
                                 controls in response to requests from
                                                                          • Generating feedback on the control
                                 clients (and their clients’ auditors).
                                                                            environment against best practice
                                 This reflect the responsibilities of
                                          Reports on Controls for
                                          Hedge Fund Managers

  and identifying potential               a hedge fund manager would             • Our knowledge of the hedge fund
  improvements in control                 typically cover the following areas:     industry allows us to advise on the
  procedures and processes.                                                        most appropriate control processes
                                          • Compliance with investment             to be included in the report and to
• Providing a convenient and                guidelines and restrictions            assess your control environment
  cost-effective method of                                                         against best practices in the hedge
  responding to elements of               • Trade execution
                                                                                   fund industry to allow you to obtain
  repetitive investor due diligence                                                maximum benefit from the report
                                          • Transaction processing
  questionnaires, assisting in the                                                 on controls process.
  marketing effort to win new             • Portfolio accounting and valuation
  clients and reducing the risk of                                               • We are also familiar with the
  competitive disadvantage as more        • Client administration and              common pitfalls encountered in
  hedge fund managers move                  NAV reporting                          producing such reports and
  towards the preparation of                                                       can assist you in managing the
                                          • Computerised information systems
  such reports.                                                                    project in an efficient and
                                            and business protection
                                                                                   well-controlled manner, so that the
• The ability to demonstrate the                                                   process has the minimum impact
                                          The hedge fund environment is
  robustness of the control                                                        on your organisation.
                                          characterised by a high level of
  environment to a potential third
                                          outsourcing to third party service
  party acquirer, should the need
                                          providers. The clear articulation
  arise in the future.
                                          of internal control processes
                                          surrounding such arrangements
Preparation                               is an area of focus of investors
Under the SAS70 and FRAG21                and regulators.
guidance, reports on controls are
prepared by the directors of the          Reporting Accountants
hedge fund manager entity
                                          PricewaterhouseCoopers is well
and describe:
                                          placed to assist hedge fund
• The control objectives of all or part   managers with the development
  of the business;                        of their reports on controls:

• The control activities that have        • We have unrivalled experience
  been put in place to meet those           in assessing control processes
  control objectives; and                   and reporting on SAS70/FRAG21
                                            reports in the investment
• The testing of those controls             management industry, including
  performed by the independent              acting as reporting accountants
  accountants.                              on the first reports on controls
                                            to be produced by hedge
The scope of the controls to be
                                            fund managers.
included in the document is at the
discretion of the directors, but for

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719, Robert Mellor (44) 20 7804 1385, Jerry Dawson (44) 20 7804 2624, or your usual
local PricewaterhouseCoopers contact.
                                   Corporate Governance:
                                   an important issue for
                                   Hedge Funds
                                   Changing patterns of demand driving changes in
                                   expected behaviours

Europe is seeing a significant increase in the level of demand for hedge funds from institutional
investors. In particular, pension funds are showing an increased interest. At the same time, access
by affluent and, to some extent, even retail investors to hedge fund products is increasing,
reflecting a desire to include alternative products within a diversified portfolio and taking advantage
of the changing stance of regulators in relation to the promotion of hedge funds.

                                   However, regulators are naturally        Directors’ responsibilities
                                   concerned to see that:
                                                                            Hedge funds’ Boards of Directors
                                   • assets owned by retail                 have always had a responsibility for
                                     investors are subject to good          the stewardship of shareholders’
                                     stewardship; and                       assets. Although there are, as yet, no
                                                                            universally accepted standards for
                                   • pension fund trustees adhere           corporate governance in the context
                                     to their fiduciary responsibilities    of hedge funds, Boards of Directors
                                     to scheme members to ensure            should react to the increased
                                     that scheme assets are                 focus on corporate governance by
                                     adequately protected.                  reviewing their current arrangements,
                                                                            particularly in relation to:
                                   For these reasons, the strength
                                   of a fund’s corporate governance         • the process for identifying risks
                                   arrangements will be an increasingly       associated with the activities of the
                                   important differentiator for funds         investment adviser and other key
                                   that wish to raise and retain              service providers;
                                   subscriptions from sources other
                                   than the traditional investors of high   • the controls in place at the
                                   net worth individuals, family offices      service providers to mitigate
                                   and endowments.                            against these risks;

                                                                            • the procedures by which the Board
                                   The need for balance
                                                                              of Directors monitors the operation
                                   It is important that any system of         of the relevant controls;
                                   corporate governance delivers
                                                                            • the pricing/NAV methodology,
                                   control of the operational risks faced
                                                                              related controls and escalation
                                   by a hedge fund. However, this must
                                                                              procedures; and
                                   be balanced and should not stifle
                                   the ability of the investment            • the overall effectiveness and
                                   adviser to react quickly to market         transparency of the Board of
                                   developments or implement                  Directors’ oversight over the fund’s
                                   innovative investment strategies,          key service providers
                                   provided these are within the scope
                                   of the overall investment strategy as
                                                                            Challenges for hedge fund boards
                                   determined by the Board of Directors
                                   and the Fund’s prospectus.               The starting point for the Board of
                                                                            Directors of any hedge fund is to
                                                                            define a structure for governance
                                           Corporate Governance:
                                           an important issue for
                                           Hedge Funds
                                           Changing patterns of demand driving changes in
                                           expected behaviours

that provides comfort for investors        discharge its fiduciary duties,          • the management information flows
that they have in place a system           taking into account the operational        from the Fund’s service providers
of internal controls to safeguard          structure of the hedge fund and the        and how this lends itself to
shareholders’ investments and the          important roles performed by the           effective monitoring at the level of
assets of the fund.                        investment adviser, and other key          the Board of Directors; and
                                           service providers.
Hedge fund boards are typically                                                     • how the Board of Directors
largely or wholly comprised of             Increasingly, we believe that              will record the monitoring that
non-executives who are usually             Boards of Directors of hedge funds         it performs in order to document
not involved in the day-to-day             will be requested to provide more          that it has discharged its
management of the Fund or any              information to both current and            duties appropriately.
of its delegated activities.               potential investors regarding the
                                           exercise of oversight within the fund.   Further Information
For this reason, it is usually practical
for Boards of Directors to discharge                                                PricewaterhouseCoopers has
                                           Actions to take
their duties in relation to the                                                     considerable experience in the
corporate governance of a fund, by         In summary, Boards of Directors of       design and implementation of
adopting and following procedures          hedge funds will need to consider:       effective corporate governance
which focus on monitoring by the                                                    arrangements tailored to the specific
Board of Directors of those parties        • the applicable framework,              requirements of hedge funds,
who are actually responsible for the         from a legal, regulatory and tax       drawing on the expertise of
delivery of services on a day-to-day         standpoint, within which the fund      specialists in assurance, regulation
basis: the investment adviser, the           operates, as this may dictate          and taxation and our cross-border
prime broker and the administrator.          certain base-level obligations         hedge fund network.
                                             of the Board of Directors;
Such systems of control should be
subject to a regular review of their       • the specific roles and
effectiveness to ensure that controls        responsibilities of the Board of
are functioning properly and that            Directors as distinct from other
emerging risks are identified and            parties involved in the operation
mitigated by establishing new                of the Fund, such as the
controls where necessary. It is              investment adviser, the prime
generally accepted that no system            broker and the fund administrator;
of control can be said to exist unless
it is properly documented.                 • the generic risks applicable to the
                                             hedge fund industry and the risks
The challenge for hedge funds’               which are fund-specific and how
Boards of Directors is to implement a        these are mitigated by control
governance regime that does not              activities performed by the Fund’s
overly restrict or hinder the fund’s         service providers;
investment activities, but which
enables the Board of Directors to

For further information, please telephone either of our lead European Hedge Fund contacts:
Graham Phillips (44) 20 7213 1719, Roger Turner (44) 20 7804 3249 or Robert Mellor (44) 20 7804 1385, or your usual
local PricewaterhouseCoopers contact.
                                          Tax Health Check for
                                          Hedge Funds

Who does this affect?                     length standard, and to ensure that        Dual contracts & remuneration
                                          robust documentation supports the          planning
Any hedge fund manager or adviser         current pricing. Going forward,
operating in the UK.                      this review should also extend to          The HMRC has been challenging dual
                                          any transactions between UK                employment contracts, particularly
Why should you care?                      management entities.                       those in the financial services sector.
                                                                                     In particular, concerns have been
In recent years the UK Inland Revenue     Permanent establishment                    raised as to whether existing
(now HM Revenue & Customs                                                            contractual arrangements are robust
(“HMRC”)) has focused considerable        Even where offshore management or          enough to ensure that sums paid by
attention on the hedge fund industry,     advisory companies are tax resident        offshore entities to individuals are
which, in its eyes, remains largely       outside the UK (see below), great care     structured in such a way that they do
obscure and unregulated. This has         must be taken to ensure that they are      not fall to be taxable in the UK.
been driven by perceived tax abuse in     not inadvertently carrying on some,
instances where management profits        or even all, of their business through     The HMRC is also reviewing the
are being retained by offshore entities   a UK permanent establishment – for         personal tax and remuneration
located in tax havens. The HMRC is        example, through the agency of an          planning adopted by UK based
also alive to the possibility of tax      affiliated UK company. The HMRC will       hedge fund managers. It is typical
leakage where principals engage in        actively seek to identify a permanent      for the opening letter of an enquiry
sophisticated personal tax planning,      establishment to bring additional          concerning the management vehicle
or they and their families co-invest in   profits into the charge of UK taxation.    to be accompanied by similar
offshore hedge funds.                                                                letters to the principals at their
                                          Investment Manager Exemption               home addresses.
Why are tax risks higher for the hedge                                               Company residence
fund industry?                            Where an offshore hedge fund is
                                          “trading” in the UK through the            A company is UK tax resident if its
Privately owned hedge fund managers       “agency” of a UK investment manager        ‘central management and control’
do not generally have the specialist      or adviser, that manager is in principle   is in the UK. Should the Inspector
in-house resource to deal with the        subject to tax on the fund’s behalf in     succeed in making a case that an
often complex tax issues surrounding      relation to the associated fund profits.   offshore company is UK resident, all
their operations. Since the principals    This would be calamitous for               of the company’s profits and gains will
of the business tend to focus on          external fund investors. To prevent        become chargeable to UK Corporation
operational issues rather than tax        independent UK agents and their            Tax. You should note that the
matters, tax risks may not be             offshore funds or clients from being       Inspector may also seek interest and
managed adequately. The HMRC sees         penalised, a series of safe harbour        penalties on amounts not paid, if it is
this as fertile hunting ground, and has   provisions exist known as the IME.         established that there was negligence
had success in raising substantial                                                   in filing the annual tax return.
amounts of additional tax.                Many UK hedge fund managers will
                                          rely on these safe harbour provisions      Personal tax liabilities
Which areas are typically investigated?   to escape such agency liability,
                                          but their operation can be complex.        The HMRC takes a ‘holistic’ approach
Transfer pricing                          The IME provisions should be               to hedge fund enquiries. In some
                                          reviewed on a continuous basis to          cases it seeks to attach personal tax
This is a major area of focus. Where                                                 liabilities to (broadly) the ‘owners’ of a
                                          ensure that a failure does not occur.
offshore companies are included in the                                               structure where it can be said that
                                          This is particularly important in
corporate structure, there is a need to                                              assets, such as shares, cash, property,
                                          cases where a hedge fund pursues
review and benchmark the level of                                                    etc have been moved offshore to
                                          non-traditional investment strategies
inter-company pricing against an arm’s                                               avoid tax (Section 739).
                                          such as loan origination deals.
                                         Tax Health Check for
                                         Hedge Funds

Developing tax issues                    hedge funds than previously thought        We also have a dedicated Tax
                                         will fall outside the scope of the         Investigation team, who specialise
Acquisition of securities by employees   Directive. Hedge fund managers             in HMRC negotiations. The tax
                                         need to identify which of their funds      investigation team consists of
HMRC has introduced a new annual
                                         are likely to be affected, and the         individuals who previously worked
reporting requirement for unapproved
                                         relevant paying agent(s) in their          as Inspectors of Taxes, with
share related plans. The reporting
                                         operational structure, to ensure that      considerable experience of dealing
requirements (captured within Form
                                         appropriate steps are taken to             with investigations, and are able
42) are now far more extensive than in
                                         address the Directive. This includes       to use that experience to help
previous years (the 2004/2005 return
                                         communication with investors               minimise the tax consequences of
is 16 pages) and the HMRC will be
                                         about the status of the fund under         any investigation.
more proactive in instigating penalty
                                         the Directive.
proceedings for failures in reporting.
Reportable events include the                                                       Industry and tax expertise
acquisition of securities by employees   How can we help?
                                                                                    Our hedge fund tax practice has
and could include the purchase by
                                         PricewaterhouseCoopers can                 built a wealth of experience in the
employees or their families of shares
                                         carry out reviews on each of these         following areas:
in a hedge fund. The deadline for
                                         important areas and report back our
submission is 6 July 2005.                                                          • The drafting of transfer pricing
                                         conclusions and recommendations
                                         on any relevant documentation,               documentation
EU Savings Directive
                                         operations or the current corporate
                                                                                    • Tax planning for the fund and its
The key thrust of the EU Savings         structure. The principal objective of
Directive, which will be fully           each review is to identify any potential
implemented on 1 July 2005, is the       tax exposures and to enable you to         • Dealing with a HMRC enquiry
exchange of information between          rectify them before a lengthy HMRC           or Special Compliance Office
EU member states on cross-border         enquiry ensues.                              negotiations
payments of interest to individuals.
Many offshore jurisdictions have         The review will provide you with a risk    • Tax efficient remuneration and
traditionally attracted investors who    assessment on current matters and a          retention planning solutions
wish to retain privacy. Yet a number     framework within which to address
of these jurisdictions have acceded      future operating decisions.                • LLP conversions
to EU wishes and agreed to require                                                  • Personal tax planning
local paying agents to report (or to     What should I do if a HMRC enquiry
withhold tax on) relevant payments       has already started?                       • Fund re-organisations
to EU investors, which would include
distributions and redemptions from       Contact us immediately!                    • Assistance with drafting of
hedge funds that are debt invested.                                                   legal agreements
                                         Our industry knowledge and
Paying agents located within the         experience put us in an excellent
EU will have similar obligations.        position to assist you in dealing with
Recent developments in the UK and        a potentially arduous enquiry.
other jurisdictions suggest more

For further information, please telephone either of our lead European Hedge Fund contacts:
Robert Mellor – Partner (44) 20 7804 1385, Martin Smith – Partner (44) 20 7212 5524,
Elizabeth Stone – Director (44) 20 7804 9678 or Debbie Payne – Senior Manager (44) 20 7213 5443, or your usual local
PricewaterhouseCoopers contact.
                                      European Hedge Fund Group

Lead European Hedge Fund contacts: Graham Phillips (44) 20 7213 1719 and Robert Mellor (44) 20 7804 1385

                                      United Kingdom                           Ireland
                                      Graham Phillips (44) 20 7213 1719        Damian Neylin (353) 1 662 6551
                                      graham.p.phillips@uk.pwc.com             damian.neylin@ie.pwc.com
                                      Robert Mellor (44) 20 7804 1385          Olwyn Alexander (353) 1 704 8719
                                      robert.mellor@uk.pwc.com                 olwyn.m.alexander@ie.pwc.com
                                      Jerry Dawson (44) 20 7804 2624           Ken Owens (353) 1 704 8542
                                      jerry.dawson@uk.pwc.com                  ken.owens@ie.pwc.com
                                      Debbie Payne (44) 20 7213 5443
                                                                               Didier Prime (352) 49 48 48 2515
                                      Elizabeth Stone (44) 20 7804 9678
                                                                               Laurent de la Mettrie (352) 49 48 48 3204
                                      Channel Islands/Jersey                   laurent.de.la.mettrie@lu.pwc.com
                                      David Pirouet (44) 1534 838 302
                                                                               Joseph Camilleri (356) 25 647 603
                                      Channel Islands/Guernsey                 joseph.camilleri@mt.pwc.com
                                      Simon Perry (44) 1481 719 357
                                                                               Kees Hage (31) 10 4008 414
                                      France                                   kees.hage@nl.pwc.com
                                      Marie-Elisa Roussel (33) 1 56 57 87 86   Sylvie Villoria (31) 10 4008 440
                                      marie-elisa.roussel@fr.pwc.com           sylvie.villoria@nl.pwc.com

                                      Finland                                  Norway
                                      Tuukka Lahkela (358) 9 2280 1333         Petra Liset (47) 95 26 01 52
                                      tuukka.lahkela@fi.pwc.com                petra.liset@no.pwc.com

                                      Germany                                  Spain
                                      Robert Welzel (49) 69 9585 6758          Antonio Greño (34) 91 568 46 36
                                      robert.welzel@de.pwc.com                 antonio.greno@es.pwc.com
                                      Steffen Gnutzmann (49) 69 9585 6474
                                                                               Sussanne Sundvall (46) 8 555 33273
                                      Greece                                   sussanne.sundvall@se.pwc.com
                                      Nicos Komodromos (30) 210 6874 671
                                                                               Thomas Huber (41) 44 630 2436
                                      Isle of Man                              thomas.huber@ch.pwc.com
                                      Mike Simpson (44) 1624 689 689           Adrian Roth (41) 44 630 2424
                                      michael.simpson@iom.pwc.com              adrian.roth@ch.pwc.com
                                                                               Victor Meyer (41) 44 630 4340
                                      Lia Turri (39) 02 7785 356
                                      European Hedge Fund Group

Lead Global Alternative Investment Management Group contact: Anthony Artabane (1) 646 471 7830

Bahamas                               United States                           Mark Casella (1) 646 471 2500
Clifford Johnson (1) 242 302 5307     Boston
clifford.a.johnson@bs.pwc.com                                                 Marvin Nagler (1) 646 471 8429
                                      Mark Rosenblatt (1) 617 530 7240
John Ranson (1) 242 302 5308          mark.rosenblatt@us.pwc.com
john.r.ranson@bs.pwc.com                                                      Michael Greenstein (1) 646 471 3070
                                      Paula Smith (1) 617 530 7906
Bermuda                                                                       Barry Knee (1) 646 471 5898
Andrew Brook (1) 441 299 7126                                                 barry.knee@us.pwc.com
andrew.brook@bm.pwc.com               Christopher Cornwall (1) 312 298 4816
                                                                              Linda Ianieri (1) 646 471 2400
George Holmes (1) 441 299 7109                                                linda.ianieri@us.pwc.com
george.holmes@bm.pwc.com              Dallas
                                                                              Linda McGowan (1) 646 471 7480
                                      Robert Collins (1) 713 356 6851         linda.s.mcgowan@us.pwc.com
Cayman Islands                        robert.c.collins@us.pwc.com
                                                                              John Reville (1) 646 471 7845
Noel Reilly (1) 345 914 8600          Denver                                  john.reville@us.pwc.com
                                      Gregory Hinkle (1) 720 931 7344         Thomas Romeo (1) 646 471 8048
Graeme Sunley (1) 345 914 8642        gregory.hinkle@us.pwc.com               thomas.romeo@us.pwc.com
                                      Los Angeles                             William Taggart Jr. (1) 646 471 2780
Middle East Region                    David Chrencik (1) 213 356 6130         william.taggart@us.pwc.com
Ashruff Jamall (971) 4 304 3105       david.g.chrencik@us.pwc.com             Philadelphia
ashruff.jamall@ae.pwc.com             New York                                William McGinley (1) 267 330 2140
                                      Anthony Artabane (1) 646 471 7830       william.c.mcginley@us.pwc.com
Netherlands Antilles                  anthony.artabane@us.pwc.com             San Francisco
Cees Rokx (599) 9 430 0000            Gina Biondo (1) 646 471 2770            Gregory Eckert (1) 415 498 7443
cees.rokx@an.pwc.com                  gina.biondo@us.pwc.com                  gregory.eckert@us.pwc.com
                                      Gregory Culloo (1) 646 471 7504         Lucinda Powers (1) 415 498 6210
                                      gregory.culloo@us.pwc.com               lucinda.powers@us.pwc.com
                                      Frank Calabro (1) 646 471 7842          Seattle
                                                                              Michele Godvin (1) 206 398 3801


                                      Hong Kong                               Sydney
                                      Robert Grome (852) 2289 1133            David Prothero (61) 2 8266 2916
                                      robert.grome@hk.pwc.com                 david.prothero@au.pwc.com

                                      Singapore                               Tokyo
                                      Justin Ong (65) 6236 3708               Peter Finnerty (81) 3 5532 2530
                                      justin.ong@sg.pwc.com                   peter.finnerty@jp.pwc.com
                                                                              Stuart Porter (81) 3 5251 2944

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